Gold’s Best Quarter Since 1986

To say that gold has done well in the first quarter of 2016 would be a tremendous understatement. Not only has gold outshined every other asset class since January of 2016, including stocks, bonds and oil; but the yellow metal has turned in its best performing quarter since 1986.

There have been several forces driving gold: a precarious stock market, lack of confidence in the Federal Reserve and other central banks, a more frequent imposition of negative interest rates by European banks, and a contracting global economy largely brought on by declining oil prices.

STOCK MARKET

Shaky investor confidence rocked the equities markets in the first six weeks of 2016. Even though stocks rallied around February 11, the decline was sufficient to motivate investors to flock to gold as a safe haven. Gold is negatively correlated to the stock market, so it wasn’t entirely surprising when it exploded to the upside over 16%. A rally in commodities also helped the gold market. But when stocks began to fail earlier in the year, panicking investors craved a safe outlet for funds normally earmarked for stocks.

LACK OF CONFIDENCE IN THE FED AND OTHER CENTRAL BANKS

European Central Bank President, Mario Draghi, has implemented quantitative easing for a number of years now in the Eurozone, without having ignited a significant jump-start to the European economy or relief from widespread deflation. Wary of the ECB’s failure to ignite economic growth, investors turned to gold for safety and security. The same investor distrust could be seen here in the U.S. when investors lost confidence in the Fed after Janet Yellen and the board of Governors softened their initial plan for a series of rate increases.

EUROPEAN BANKS’ NEGATIVE INTEREST RATES

Traditionally, interest-bearing bank accounts and bonds have been gold’s biggest competitor for investment funds. Investors’ point of view has always been if they can earn interest on their money, there’s no reason for them to invest in gold, which, after all, yields no interest. But when countries like Sweden, Denmark and Switzerland started applying negative rates of interest to bank accounts, investors all over Europe began to move money to gold. Here in the United States, we saw the same phenomenon when, last November, Janet Yellen suggested negative rates were an option that remained “on the table.” Investors, in other words, became alarmed when it occurred to them they actually could be charged to keep their money in the bank. Under the circumstances, investing money in gold seemed a much more promising opportunity.

A CONTRACTING GLOBAL ECONOMY
When demand for oil dropped, its price followed accordingly. As a result, the bottom dropped out of many types of business across the planet early in 2016. European consumers found themselves unable to afford products manufactured in the U.S. due to the strong dollar, so export business suffered in this country. China’s devaluation of its yuan as well as its own economic slowdown set off an immense contraction of the global economy at large.

A confluence of all the above forces contributed to the surge in the gold price to give the shiny metal its biggest quarter in thirty years. Gold hit its all-time high of $1,917.90 in August, 2011. Inasmuch as markets have memory, and gold’s high has been $1,280 thus far in 2016, we suggest you consider investing in physical gold, since it still has room to move much higher.